Learn how to pay yourself from your limited company effectively while maximizing tax efficiency and personal allowances.
Dividend taxMerranti

How to Pay Yourself from Your Company in 2025/26

If you run your own limited company, how you take money out of the business is one of the most important financial decisions you’ll make each year.

With Corporation Tax rates now at 25%, dividend allowances reduced to just £500, and income tax thresholds still frozen for 2025/26, the balance between salary, dividends, and other methods of extracting profits has never been tighter.

In this guide, we break down the main ways to pay yourself, the tax efficiency of each, and how to structure a strategy that makes the most of your personal allowances while keeping the company compliant and cash-efficient.

1. The Main Ways to Pay Yourself from a Limited Company

Most directors of small or family-run limited companies can pay themselves in five ways:

  • Salary (through PAYE)
  • Dividends (from post-tax company profits)
  • Directors’ loans (borrowed temporarily from company funds)
  • Reimbursed expenses (for legitimate business costs)
  • Benefits in kind (such as electric cars or mobile phones)

Each method has different tax implications — and using the right combination is essential for efficiency and compliance.

2. Salary: Using the Tax and NIC Thresholds

A salary is classed as a business expense — meaning it reduces the company’s taxable profit and its Corporation Tax bill.

Most directors choose to pay themselves a small salary, usually up to the Primary Threshold for National Insurance, or slightly below.

For 2025/26:

  • £12,570 = Personal allowance (no income tax below this)
  • £9,100 = NIC Primary Threshold (no employee NIC below this)
  • £758/month = Secondary Threshold for employer NIC (13.8% above this, unless covered by the Employment Allowance)

Common strategy:

  • Pay yourself £758/month (£9,096 per year)
  • No employee NIC
  • No employer NIC if not claiming Employment Allowance
  • Counts as a qualifying year for State Pension and NI record
  • Fully deductible against Corporation Tax

You must run this through a proper PAYE payroll system — even if you’re the only employee.

3. Dividends: Extracting Profit After Tax

Dividends are paid out of a company’s retained profits — i.e. profits after Corporation Tax. They are not deductible for Corporation Tax purposes.

Dividends must be:

  • Paid to shareholders (you must own shares)
  • Declared from available reserves
  • Backed up by board meeting minutes and company accounts
  • Paid in proportion to shareholdings (unless alphabet shares exist)

2025/26 Dividend Tax Rates:

  • £0–£500 = 0% (dividend allowance)
  • Basic rate = 8.75%
  • Higher rate = 33.75%
  • Additional rate = 39.35%

The dividend allowance has been cut again in 2025/26 to £500, so timing and planning are even more important.

Example strategy:

  • Pay yourself £9,096 salary
  • Declare dividends up to £41,174 (to stay within the £50,270 basic rate threshold)
  • Total income = £50,270
  • Tax on dividends = £3,574 approx
  • No NIC payable

This remains one of the most tax-efficient structures for owner-directors.

4. Director’s Loans: Use with Caution

A director’s loan is any money you take out of the company that isn’t salary, dividend, or expense reimbursement.

It’s fine to borrow short term — but there are strict rules:

  • If unpaid within 9 months of year-end, the company must pay Section 455 tax at 33.75%
  • The loan must be reported on your personal Self Assessment return
  • Interest may be due (or a benefit-in-kind reported) if the loan exceeds £10,000

To avoid tax complications, keep director’s loans small, short-term, and documented — or repay them before the 9-month deadline.

At Merranti, we monitor director’s loan balances throughout the year to avoid any unexpected Section 455 charges.

5. Reimbursed Expenses: Legitimate and Tax-Free

If you incur expenses personally while working for the company, you can reclaim them — tax-free — as long as they are:

  • Wholly, exclusively and necessarily for business
  • Properly documented (receipts and logs)
  • Not part of your usual commuting or personal costs

Common examples:

  • Travel to client sites
  • Mileage (at HMRC’s 45p/25p rates)
  • Home office costs (apportioned electricity, broadband)
  • Phone bills (if used for work)

Reimbursing these costs doesn’t count as income and won’t attract tax — but you need clear records in case HMRC ever checks.

6. Benefits in Kind: Smart Use of Perks

You can also extract value from your company through taxable or exempt benefits, including:

Common director-friendly benefits:

  • Mobile phone contract (one per employee, tax-free)
  • Trivial benefits (up to £50 each, capped at £300 per year for directors)
  • Electric vehicles (currently low BIK rates: 2% in 2025/26)
  • Company pension contributions (see next section)
  • Private medical insurance (taxable benefit, but sometimes efficient)

Electric cars, in particular, remain a standout benefit, allowing your company to buy the car and offer you very low personal tax cost, while still getting Corporation Tax relief on purchase and running costs.

7. Pension Contributions: Pay from Company, Not Personal

Your company can make employer pension contributions directly to your pension, up to £60,000 per tax year (or more with carry-forward), as long as:

  • You’re an employee or director
  • The contributions pass the “wholly and exclusively” test
  • You do not exceed your Annual Allowance (or adjusted limits)

These contributions:

  • Are free of Income Tax or NICs
  • Are a deductible business expense for Corporation Tax
  • Build your retirement fund in a highly tax-efficient way

At Merranti, we often include pensions in year-end tax planning — especially when profits are too high for dividends alone to be efficient.

8. Timing: Pay Before or After Year-End?

When paying dividends or bonuses, timing matters:

  • Dividends are taxed based on the date declared, not the date paid
  • Salaries and bonuses are taxed when they are earned (not necessarily paid)
  • Pension contributions count for the tax year in which they are received by the scheme

We can help you structure payouts just before or after the year-end, depending on which tax year needs the relief.

9. Common Mistakes to Avoid

  • Taking large dividends without checking profit reserves
  • Failing to process salary through PAYE (even for small amounts)
  • Using company funds for personal costs without treatment
  • Forgetting Section 455 tax on unpaid loans
  • Missing the dividend paperwork (minutes, vouchers, accounting entries)
  • Paying yourself too much too early, resulting in unexpected tax or NI

Final Thoughts

If you own a limited company, there is no one-size-fits-all answer for how to pay yourself. But in 2025/26, with more restrictions and tighter allowances than ever, your pay strategy matters.

At Merranti, we help directors:

  • Structure salary and dividends around current thresholds
  • Monitor director’s loans and tax traps
  • Build tax-efficient pension strategies
  • Run compliant payroll and dividend records
  • Prepare end-of-year bonus or profit extractions without penalties

Need help optimising your director’s pay for 2025/26?
Book a Pay Strategy Review with Merranti — and make every pound you take out count.

Related Post